Cost of Customers

“You can’t manage what you can’t measure.”

This well-worn business saying holds truer than ever when it comes to the cost of gaining new customers, known in financial terms as Customer Acquisition Cost (professional service firms can substitute 'client' for 'customer').

Your business's Customer Acquisition Cost (CAC) represents the total price you pay to convert a lead into a sale, including the cost of research, lead generation and sales personnel.

Measuring and tracking CAC has gained popularity among businesses. Essential to predicting the imminent success (or failure) of new and established enterprises, understanding CAC and how to adjust yours will allow you to measure the amount your company can afford to spend on new customers.

OPERATING IN THE NUMERICAL DARK

Online businesses can monitor CACs with the click of a button. Their owners have long understood the importance of tracking this metric. Although slightly more complicated to calculate, all businesses – regardless of type – will benefit from actively managing CACs.

According to the CMO Survey's February 2018 results , businesses on average spend 11% of their total budget on marketing. When considering CAC, marketing is only a thin slice of the pie. When you add several expense categories that come into play to acquire a customer, the price of each customer easily skyrockets.

Failing to measure CAC limits management's insight into the profitability of customer acquisition methods and, as a result, hinders business sustainability.

Do you know what your company spends for each customer you acquire or how much revenue you gain from each customer acquired?

You can answer these important questions by determining your company's Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLTV) and then putting the knowledge into action. Thoroughly answering these questions means more than calculating a couple of business metrics; you must also understand how the numbers you calculate are related and how they translate to active business decisions. 

You need to find a successful balance between the two metrics: how much your company spends to acquire each new customer and how much each customer's business is truly worth. If you can calculate each customer's lifetime value and how much gross profit you make from each customer, then you can take an actionable approach to track your CAC.

This ensures that you are spending enough to continue attracting new customers, while not over-spending. Learning to calculate these valuable key performance indicators and understanding the relationship between them will become invaluable to your company's success.